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The Hiring Incentives to Restore Employment (“HIRE”) Act, signed into law in 2010, included modified provisions of the previously proposed Foreign Account Tax Compliance Act of 2009 (“FATCA”). These provisions involve two broad categories of tax compliance: reporting by foreign financial institutions on accounts held by U.S. persons, and reporting by U.S. individuals on specified foreign financial assets. It is the latter category that led to the new Form 8938 Statement of Specified Foreign Financial Assets, to be filed in 2012 as part of an individual’s 2011 federal income tax return.

Unlike Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”), which is filed with the U.S. Treasury by June 30 of each year to report on accounts with respect to the previous calendar year, IRS Form 8938 is part of an individual’s federal income tax return. What follows is a general summary of the basics, comparing the two reporting obligations, along with some examples illustrating the rules. A tax advisor should be consulted about the specifics of any filing requirements and the information to be reported.

It is important to review completely the filing requirements for both the FBAR and Form 8938 as some persons may be required to file only one of the forms while some persons may have to file both or may have no filing requirement at all.

The following are examples illustrating the differences in the filing requirements for the two forms (assuming the financial thresholds for each have been exceeded and that the assets described in each example are the only foreign assets involved).

1.) Individual A has signature authority but no financial interest in foreign financial accounts owned by foreign subsidiaries of the privately-held U.S. corporation for which he works. A has to file the FBAR but would not have to file Form 8938 with regard to those accounts because he holds no financial interest in the accounts.

2.) Individual B and his wife, who reside in the U.S., have invested $200,000 in a resort property in a foreign country. To pay bills related to the property, B opened a checking account at a bank in the foreign country but the balance has never exceeded US$5,000. B will not have to file Form 8938 to report the resort property because it is not a specified foreign financial asset. While the bank account is a specified foreign financial asset, it is B’s only such asset and its value has not exceeded the threshold for reporting on Form 8938. In the alternative, if B holds the resort property through a foreign limited liability company, B would file Form 8938 to report the shares of that foreign company and the checking account as specified foreign financial assets because the aggregate value of the specified foreign financial assets, $205,000, exceeds the threshold for reporting. B has no requirement to file the FBAR because the value of the checking account has not exceeded the threshold of $10,000.

3.) Individual C owns an 80% interest in the capital and profits of a partnership formed under foreign law and engaged in an active trade or business in a foreign country where C is actively involved in the business. C is required to report the foreign financial accounts of the partnership on an FBAR because he is considered to have a financial interest in the accounts owned by the partnership he controls. He would not report those accounts on Form 8938, provided that his interest in them is solely as a result of his status as a partner in the partnership. Because the partnership is engaged in an active trade or business and C reports about it on a Form 8865 included with his annual income tax return, C’s interest in the partnership would be reported in Part IV of Form 8938 indicating he has reported about the partnership on Form 8865.

4.) Individual D owns 100% of a U.S. S corporation that has set up a Texas limited liability company to operate a branch in a foreign country where that company has a bank account. The Texas limited liability company is treated as a disregarded entity for U.S. federal income tax purposes. D’s S corporation may have to file Form 8938 as a “specified domestic entity” in future years, but not for 2011, to report the foreign financial account held through the Texas limited liability company/disregarded entity. For FBAR purposes, the Texas limited liability company will have a filing requirement (even though it is disregarded for federal income tax purposes). D as well as the S corporation will also have to file the FBAR to report their indirect interests in the bank account of the Texas limited liability company (although the Texas limited liability company may be able to file a “consolidated” FBAR with the S corporation).

5.) Individual E has invested in a private equity fund, organized as a partnership outside the U.S., which invests in green energy projects in developing countries. E’s interest in the fund is less than 1%. Under the 2011 rules clarifying FBAR filing requirements, the private equity fund is not considered a foreign financial account if it is not a pooled fund that is available to the general public with a regular net asset value determination and regular redemptions. Because E’s interest is 50% or less in the fund, he is not considered to have a financial interest in any foreign financial accounts of the fund and does not have to file an FBAR to report about them. However, E must report his investment in Part I of Form 8938 as a foreign financial account because investment vehicles such as foreign private equity funds are included in the definition of a “foreign financial institution” for purposes of reporting a financial account maintained by a foreign financial institution.

6.) Individual F is a resident alien, for U.S. federal income tax purposes, whose relatives all reside in a foreign country. To help his cousin start a new business in the foreign country, F loaned him $100,000 in 2011 and wired that amount from F’s U.S. bank account to his cousin’s bank account in the foreign country after his cousin signed a promissory note. F did not acquire any interest in his cousin’s business. Because F has no financial interest in the foreign bank account of his cousin and has acquired no interest in his cousin’s business (which has its own foreign bank accounts), F has no requirement to file an FBAR. However, because a foreign person, F’s cousin, is a party to the contract, F is required to file Form 8938 to report the promissory note as a specified foreign financial asset.

7.) Individual G is a citizen of a foreign country but is a resident alien of the U.S. on a long-term assignment as an employee of the U.S. subsidiary of a foreign, publicly traded parent company. G has always contributed to the deferred compensation plan offered by the foreign parent company but is not yet eligible to take distributions from the plan. The interest G has accumulated in the foreign deferred compensation plan is a specified foreign financial asset that G must report on Form 8938.

The rules enacted by the HIRE Act add a new level of complexity to identifying, tracking, and valuing specified foreign financial assets, and the tax items attributable to them, for purposes of reporting on new Form 8938. The foregoing is not a comprehensive analysis of all the types of assets that may need to be reported and so U.S. persons should consult their tax advisors about obligations in their cases. For more information on FBAR and Form 8938, contact Meril Markley (mmarkley@uhy-us.com) or Mesa Hodson (mhodson@uhy-us.com).

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